Employee Whistleblower Claims A Legal Overview

Transcription

1 Employee Whistleblower Claims A Legal Overview Heidi Goldstein Shepherd James W. Nagle, P.C. Goodwin Procter LLP Exchange Place Boston, MA (617) Goodwin Procter LLP. All rights reserved. The authors gratefully express their appreciation to Rachel Valente and Jeffrey S. Siegel for their contributions to these materials.

2 Table of Contents I. Introduction: The New Generation of Whistleblowing Claims Will Bring Additional Complexity and Uncertainty to the Employment Relationship...1 II. III. IV. The Sarbanes-Oxley Act...3 A. Civil Whistleblower Protections, Generally...3 B. Parties Responding Entities and Individuals Employees...5 C. Protected Activity...6 D. Unfavorable Personnel Action...7 E. Procedure Filing with the DOL Statute of Limitations DOL Investigation Hearing Before an Administrative Law Judge Review by the Administrative Review Board and Appeal to the Appropriate Circuit Court Enforcement of Settlement Agreement or Administrative Order Right to File in Federal District Court Effect of Arbitration Agreement...13 F. Burden of Proof...14 G. Remedies...17 H. Criminal Liability...17 Other Federal Whistleblower Protection Statutes...18 A. Federal Deposit Insurance Corporation Improvement Act Protected Activity Affirmative Defense Burdens of Proof...19 B. Federal Credit Union Act Protected Activity Affirmative Defense Defining an Adverse Action Burdens of Proof...21 C. The USA Patriot Act...21 D. False Claims Act (Qui Tam) Purpose Protected Activity Burden of Proof...22 E. Environmental and Health Statutes...23 F. Uniformed Services Employment and Reemployment Rights Act ( USERRA )...23 State Statutory and Common Law Whistleblower Protections...24 A. Massachusetts Whistleblower Statutes Public Employees...24

3 2. Health Care Employees Employees of Public Charities...25 B. Massachusetts False Claims Act...25 C. Boston Smoking Ordinance...25 D. Common Law Retaliatory Discharge Claims Under the Public Policy Exception to At-Will Employment Massachusetts Public Policy Doctrine...26 V. Employment Statutes Compared on Burden of Proof Issues...28 A. Mixed Motive Cases -- Direct Evidence of Discrimination...28 B. The McDonnell Douglas Burden Shifting Method of Proof The Prima Facie Case of Retaliation The Employer s Legitimate, Nonretaliatory Reason for Its Actions Plaintiff Must Prove Pretext for Retaliation...31 VI. Policies and Procedures for Addressing Internal Complaints/Codes of Conduct...31 A. Sexual and Other Forms of Harassment...31 B. Sarbanes-Oxley Sections 301 and SEC, NASDAQ, NYSE, and AMEX Rules Codes of Conduct May Create Contractual Rights...34 (ii)

4 Employee Whistleblower Claims A Legal Overview I. Introduction: The New Generation of Whistleblowing Claims Will Bring Additional Complexity and Uncertainty to the Employment Relationship In the summer of 2002, Congress passed the Sarbanes-Oxley Act ( SOX ), which includes protections for whistleblowers who make either internal or external charges of fraud against their employers. Although SOX s coverage is limited to public companies, it is a harbinger of the next generation of whistleblower claims. In SOX s wake, a number of states are passing whistleblower statutes with far broader coverage. For example, in September 2003, California enacted a whistleblower statute that protects employees of any private corporation in the state who report a violation of state or federal statute or noncompliance with a state or federal rule or regulation to a government or law enforcement agency. Cal. Labor Code (b) (2004). California s attorney general s office has established a whistleblower hotline and all employers are required to post the telephone number of the hotline and alert all employees as to their rights under the statute. Illinois recently passed a similar statute. 740 Ill. Comp. Stat. 174/1, et seq. (2004). There is currently legislation pending in Massachusetts to apply SOX-type protections to employees of public charities. In addition, Massachusetts already has in place a common law cause of action for all employees who complain, either internally or externally, that their employer is violating the law. SOX, and a number of other whistleblower statutes cited in these materials, turn traditional burden of proof standards for employment cases on their head. Under SOX, once an employee has established a prima facie case of retaliation by submitting evidence that retaliation was a contributing factor to the adverse employment action, a presumption of retaliation is created. In order to defeat this presumption, the employer must establish, by clear and convincing evidence, that it would have taken the same action with respect to the employee, regardless of the alleged protected activity. See, e.g., SOX, 18 U.S.C. 1541A(b)(2)(A), (c); Clean Air Act, 42 U.S.C. 7622; Whistleblower Protection Act, 5 U.S.C. 1221(e); FDIA, 12 U.S.C. 1831j(f); Cal. Labor Code Applying this burden of proof framework may effectively require employers not merely to have good reasons for their employment actions, but instead to establish the equivalent of just cause. 1 It is important to carefully analyze any burdens of proof set forth in the whistleblower statute at issue in any given case. A number of courts continue to apply the McDonnell Douglas burdens to whistleblower statutes where those statutes are silent on the burden of proof issue. See Doyle v. United States Secretary of Labor, 285 F.3d 243, 250 (3rd Cir. 2002) (applying McDonnell-Douglas burdens of proof to claim brought under the Energy Reorganization Act of 1974, 42 U.S.C. 5851); Passaic Valley Sewerage Comm rs v. Dep t of Labor, 992 F.2d 474 (3d Cir 1993) (applying version of McDonnell Douglas standard to Clean Water Act); Mann v. Olsten Certified Healthcare Corp., 49 F. Supp. 2d 1307, 1317 (M.D. Ala. 1999) (applying McDonnell Douglas Standard to False Claims Act). 1

5 The earliest SOX cases are highlighting the perils and the burdens of defending against SOX claims: In Welch v. Cardinal Bankshares, Inc., a Department of Labor Administrative Law Judge ( ALJ ) held that a bank holding company in Virginia violated SOX when it terminated its Chief Financial Officer. Welch, the CFO, made various internal complaints about alleged accounting improprieties at the company to the company s Chief Executive Officer and its audit committee. When the company asked Welch to meet with its lawyers and accountants in order to permit it to investigate his claims, Welch refused to do so unless his personal attorney could also be present. The company denied Welch s request and terminated him for refusing to cooperate with its investigation into his allegations. The ALJ did not consider the company s reason for terminating Welch to be valid and instead found that the true reason was retaliation against Welch for making his complaints. The ALJ ordered the company to reinstate Welch to his CFO position and pay his back pay and attorneys fees. The case is currently under appeal. In Getman v. Southwest Securities, Inc., an ALJ held that an employee s disagreement with her supervisor about the appropriate rating to be issued by her employer for a company s stock could serve as protected conduct for purposes of SOX even where her employer never pressured her to change her recommended rating. In March 2003, Coca-Cola terminated the employment of Mark Whitley, its finance director for supply management, as part of a restructuring. Whitley brought a SOX complaint, alleging that his discharge was really the result of his whistleblowing activities and seeking $44.4 million in damages. Whitley contended that between 1998 and 2001, the company overstated net revenue and gross profit by recording marketing allowances to some customers as expenses rather than as rebates. The lawsuit also charged the company with falsifying certain market research in order to convince Burger King to sell a Frozen Coke product. In October 2003, Coca-Cola settled its dispute with Whitley for $540,000. Both the Department of Justice and the Securities and Exchange Commission are investigating the company with respect to Whitley s allegations. Thus, the stakes in SOX and other whistleblowing claims are high. These statutes have broadreaching ramifications for both public and private companies. To assist clients in recognizing and responding to claims brought under SOX and other whistleblower statutes, these materials review SOX s whistleblower provisions in detail, in terms of both procedure and interpretation. The materials then provide information with respect to a number of other federal and state whistleblowing statutes that clients routinely encounter and also discuss the Massachusetts common law cause of action for discharge in violation of public policy. Next, the materials provide a discussion of the burdens of proof available under McDonnell Douglas, which remains applicable to a number of whistleblower statutes. Finally, these materials address codes of conduct and the requirements for such documents set forth by various stock exchanges. 2

6 II. The Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002, Pub. L. No , 116 Stat. 745 ( SOX ) was Congress s reaction to the recent corporate accounting scandals like those at Enron and WorldCom which received widespread press coverage. SOX s principle focus is corporate financial accountability, including reforming the oversight of accounting practices. 2 The statute also contains both civil and criminal protections for whistleblowers. These materials focus primarily on the civil protections. A. Civil Whistleblower Protections, Generally SOX s civil whistleblower protections are contained in Section 806, codified as 18 U.S.C. 1514A ( Civil action to protect against retaliation in fraud cases ): (a) No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)), or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against any employee in the terms and conditions of employment because of any lawful act done by the employee (1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [frauds and swindles], 1343 [fraud by wire, radio, or television], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by (A) a Federal regulatory or law enforcement agency; (B) any Member of Congress or any committee of Congress; or (C) a person with supervisory authority over the employee (or such other person working for the employer who has the 2 For more information on the corporate financial accountability provisions of the Sarbanes-Oxley Act, please refer to the extensive materials prepared by Goodwin Procter, LLP, which are available at 3

7 authority to investigate, discover, or terminate misconduct); or (2) to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders. The DOL 3 has promulgated interim final rules that describe the procedure a complainant must follow in pursuing a civil cause of action under SOX, and the method of proving his case in the DOL administrative process ( DOL regulations ). See Procedures for the Handling of Discrimination Complaints under Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, 68 Fed. Reg According to the Associate Solicitor of the Fair Labor Standards Division, as of December 2003, the DOL had received 169 charges claiming whistleblower retaliation in violation of SOX since the statute s enactment. 4 Of the 79 investigations by the DOL, only two had resulted in a finding that the employee s claims had merit. Whistleblowers, Sarbanes Oxley Cases are Core of Nontraditional DOL Cases, IER Newsletter, Vol. 173, No. 17 (BNA Dec. 22, 2003). Only seven of the cases filed with the DOL had been voluntarily dismissed by complainants and then filed in federal court. Id. As more people become aware of the statute, with its broad protections for individuals who blow the whistle on alleged corporate malfeasance, the number of claims is expected to grow rapidly. B. Parties 1. Responding Entities and Individuals The threshold question is whether the person or entity that allegedly retaliated against an employee in violation of SOX is either (1) a company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)) or (2) any officer, employee, contractor, subcontractor, or agent of such company. 18 U.S.C. 1514A. The former is defined by the DOL regulations simply as a company, and the latter as a company representative. 29 C.F.R The regulations were promulgated by the DOL s Occupational Safety and Health Administration ( OSHA ). As a point of comparison, the Equal Employment Opportunity Commission ( EEOC ) received almost 85,000 new charges in FY 2002, alone. 4

8 a. Companies Because the DOL is tasked with the power to adjudicate whistleblower claims, it is the DOL, and not the SEC, that must interpret securities law to determine whether a respondent is a company for purposes of the statute. Such was the case in Flake v. New World Pasta, a case in which a DOL Administrative Law Judge ( ALJ ) granted the respondent s motion for summary judgment after concluding that the respondent, the complainant s employer, was not a company for SOX purposes SOX-18, at 3-4 (ALJ July 7, 2003) 5 (holding that respondent was not required to file reports under section 15(d) because its securities were held by fewer than 300 persons at the start of the fiscal year and it had never registered a class of securities under Section 12), aff d, No (ARB Feb. 25, 2004) at 6. It is likely that subsidiaries of covered entities also will be considered to be companies for purposes of the statute. In Morefield v. Exelon Services, Inc., 2004-SOX-00002, at 4 (ALJ Jan. 28, 2004), the ALJ held that non-public subsidiaries of publicly traded companies are liable for their retaliation against their own employee whistleblowers, stating [n]othing in the Act persuades me that Congress intended to wall off from the whistleblower protection [sic] Sarbanes-Oxley vast segments of corporate America that reside under the umbrella of publicly traded companies. See also Platone v. Atlantic Coast Airlines, 2003-SOX-27 at 18 (finding non-public subsidiary to be covered entity where its holding company was public, the two entities did not maintain clearly separate identities with respect to extending employee benefits and other terms of employment and there was significant commonality in the senior management of the two entities) (ALJ April 30, 2004). But see Powers v. Pinnacle Airlines, Inc., 2003-AIR- 12 (ALJ Mar. 5, 2003) (non-public subsidiary of publicly traded company was not covered entity for SOX purposes where the complainant only named the subsidiary, and not the public parent company, as the respondent). Alternatively, a complainant could argue that a subsidiary constitutes a company representative, as discussed below. b. Company Representatives Unlike most federal whistleblowing statutes, SOX provides for individual liability. Specifically, Section 806 prohibits retaliation by a company representative, defined as an officer, employee, contractor, subcontractor, or an agent of a company. To date no company representative has been held liable under the statute. 2. Employees Section 806 does not define or at all modify the term employee. The DOL regulations define an employee as an individual presently or formerly working for a company or company representative, an individual applying to work for a company or company representative, or an individual whose employment could be affected by a company or company representative. 5 All ALJ cases cited in this article can be found at the Office of the Administrative Law Judge website at 5

9 29 C.F.R This broad definition widens the category of potential claimants to include individuals not traditionally thought of as employees. For example, the DOL has taken the position that an individual who works for an entity that is not considered a company for purposes of the statute but which is a contractor of a covered company (i.e., an accounting firm) would have a claim against the covered entity if he were retaliated against for reporting financial irregularities at the covered entity. DOL Whistleblowers Investigation Manual at Note that DOL regulations do not purport to substantively interpret Section Fed. Reg. 31,860, 31,863 (May 28, 2003). Therefore, the broad definition of employee in the DOL regulations, which is not supported by the text of Section 806, will be open to challenge. C. Protected Activity Two categories of whistleblowing are protected: (1) an employee s report of conduct that the employee reasonably believes is federal fraud, and (2) an employee s participation in proceedings relating to federal fraud. To be a protected report of federal criminal fraud, the employee must reasonably believe that the reported conduct is a violation of any Securities Exchange Commission ( SEC ) rule or regulation, or a violation of 18 U.S.C (frauds and swindles), 18 U.S.C (fraud by wire, radio, or television), 18 U.S.C (bank fraud), 18 U.S.C (securities fraud), or any federal law relating to fraud against shareholders (collectively, federal fraud laws ). 18 U.S.C. 1514A(a)(1); 29 C.F.R (b)(1). A whistleblower need not demonstrate that the reported conduct actually violates any such federal law or regulation, only that he reasonably believed that such a violation occurred. Indeed, the belief can be considered reasonable even where a subsequent investigation establishes that the employee was entirely wrong. Halloum v. Intel Corp., 2003-SOX-7 at 10 (ALJ March 4, 2004). In determining whether the employee s belief was reasonable, the ALJ or court will apply an objective standard. Welch v. Cardinal Bankshares Corp., 2003-SOX-15 at 37 (ALJ Jan. 28, 2004) ( Welch II ). Further, the report must be made to, or an investigation must be conducted by one of the following: (A) a Federal regulatory or law enforcement agency; (B) any Member of Congress or any committee of Congress; or (C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct). 18 U.S.C. 1514A(a)(1); 29 C.F.R (b)(1). To be protected participation, the employee must file, cause to be filed, testify, participate in, or otherwise assist in a proceeding relating to federal fraud laws. 18 U.S.C. 1514A(a)(2); 29 C.F.R (b)(2). Some of the initial DOL cases applying SOX have resulted in broad definitions of protected activity. In Getman v. Southwest Securities, Inc., 2003-SOX-8 (ALJ Feb. 2, 2004), for example, the ALJ determined that the complainant had engaged in protected activity where her supervisors questioned a stock rating that she had issued, but did not advise her to change that rating. Specifically, Getman was employed as a research analyst by Southwest Securities, Inc. She alleged that her employment was terminated in July 2002 as a result of a presentation she made in November 2001 with respect to a company called Cholestech Corporation a company 6

10 about which she had been informed by two of the respondent s bankers. Getman was led to understand that Cholestech was interested in raising capital and that if respondent issued a report on the company, respondent could be included in a deal to raise capital. She gave the stock an accumulate rating, which was not a strong rating, because the stock had increased in value appreciably since she started her research, and she thought that it would not continue to appreciate. The purpose of the November 2001 meeting was to question her determination. She was questioned strongly and did not like the demeanor of the questioner who wanted to know why she had not issued a strong buy rating. At no time, however, was she ever instructed to change her rating. Beginning in January 2002, Getman felt that her relationship with her manager changed and she began to receive criticism about her performance and hours. Ultimately, the respondent terminated the complainant alleging performance reasons; Getman contended that it was as a result of her recommendations with respect to Cholestech and the ALJ agreed that this internal disagreement with her supervisors in the context of a discussion meeting could constitute protected activity because if the respondent had issued an incorrect rating, this would have constituted a fraud on Cholestech s shareholders. In Platone v. Atlantic Coast Airlines, 2003-SOX-27, the ALJ determined that the complainant had engaged in protected activity where she complained to her employer about fraud that was being committed against a separate entity. Platone worked as the Manager of Labor Relations for the respondent airlines. In the course of her work, she conducted an investigation and determined that members of the union for which she served as the airline s liaison the Airline Pilots Association were defrauding the union by improperly charging the union for days off. Platone alerted her supervisor about the fraud and drafted a letter to the union advising them of the issue, but was advised to drop the issue because it was a matter internal to the union. Platone was terminated shortly thereafter. The airline claimed that her termination was based on the fact that the company discovered that Platone was engaged in an intimate relationship with a senior member of the union. The employer regarded the relationship as a conflict of interest. The ALJ determined that the complainant had engaged in protected activity because it was possible that members of the airline s management were improperly channeling money to union members in order to convince these union members to make contract concessions that would favorably affect the airline s bottom line. Platone, 2003-SOX-27 at 22. The ALJ did not believe the employer s argument that it would have terminated her for the conflict of interest issue, regardless of her protected activity and found in favor of Platone. D. Unfavorable Personnel Action A private cause of action lies only if the employee is discharged, demoted, suspended, threatened, harassed, or discriminated against in any other manner (collectively, unfavorable personnel actions ) in the terms and conditions of employment. 18 U.S.C. 1514A(a). The DOL regulations state that no such actions may be taken with respect to the employee s compensation, terms, conditions, or privileges of employment. 29 C.F.R (a); Welch II, 2003-SOX-15 at (CFO who was suspended, and then terminated, experienced unfavorable personnel actions). The DOL regulations further provide that a violation exists where a company or company representative intimidates, threatens, restrains, coerces, [or] blacklists or in any other manner discriminates against an employee in the terms and conditions 7

11 of employment. 29 C.F.R (b). Thus the statute, in addition to the DOL regulations, casts a wide net on the kinds of adverse actions that are cognizable. See Halloum, 2003-SOX-7 at 10 ( [a]n employment action is unfavorable if it is reasonably likely to deter employees from making protected disclosures ). But see Dolan v. EMC Corp., 2004-SOX-1 (ALJ March 24, 2004) ( [u]nfavorable performance evaluations, absent tangible job consequences, do not constitute an adverse employment action ). E. Procedure 1. Filing with the DOL Section 806 provides that a person who alleges discharge or other discrimination by any person in violation of [SOX] may seek relief by filing a complaint with the Secretary of Labor. 18 U.S.C. 1514A(b)(1). SOX expressly incorporates a subsection of Aviation Investment and Reform Act ( AIR ) 6 that establishes the procedure the DOL must follow to adjudicate the complaint. 18 U.S.C. 1514A(b)(2). The DOL also has issued interpretive regulations to guide the processing of SOX complaints. These are codified at 29 C.F.R. part An aggrieved employee must file a complaint with the DOL no later than 90 days after the violation occurs. 18 U.S.C. 1514A(b)(2)(D); 29 U.S.C (d). The regulations require that a complaint be written, and should include a full statement of the acts and omissions, with pertinent dates. 29 C.F.R (b). A complainant may not file a complaint by telephone. Foss v. Celestica, 2004-SOX-4 at 3 (ALJ Jan. 8, 2004) (dismissing claim as time barred where complainant s written complaint, filed eight days after his phone call to DOL, fell outside of the limitations period); Cf. Walker v. Aramark Corp., 2003-SOX-22 at 3, (ALJ Aug. 26, 2003) (counting from complainant s termination date until his first contact with DOL, which was by phone, in determining that the claim was time barred). 2. Statute of Limitations The 90-day filing period runs from the date on which the discriminatory decision has been both made and communicated to the employee. 29 C.F.R (d). See also 68 Fed. Reg. 31,861 (citing Delaware State College v. Ricks, 449 U.S. 250, 258 (1980) for the proposition that the statute of limitations begins to run when the employee either knows or reasonably should be aware of the adverse action); See Foss, 2004-SOX-4 at 2 (violation date is 6 AIR contains a provision that protects airline employees from retaliation by their employers where the employee provided information to the employer or the federal government relating to an alleged violation of any order, regulation, or standard of the Federal Aviation Administration or any law relating to air carrier safety. 49 U.S.C (a)(1). Airline employees who participate in proceedings relating to any such violation also are protected from retaliation by virtue of their participation. Id. at 42121(a)(2). AIR s provisions on the burden of proof, statute of limitations, and filing procedures were the model for SOX s whistleblower protections, and thus the two statutes are procedurally quite similar. DOL regulations implementing the provisions of AIR can be found at 29 C.F.R. part

12 the date the employee received written notice of termination by Federal Express, giving the complainant the benefit of the doubt that he did not know he was being terminated on an earlier date when he refused respondent s attempt to give him termination paperwork). Many of the published ALJ decisions to date concern the statute of limitations, and whether such limitations period is subject to equitable tolling or equitable estoppel. A number of cases have been dismissed on statute of limitations grounds. A plaintiff s complaint survived a statute of limitations defense where the plaintiff claimed to have sent a complaint by Federal Express to the DOL, even though the DOL never acted on the complaint. Murray v. TXU Corp., 279 F. Supp. 2d 799, 802 (N.D. Tex. 2003) (evidence included plaintiff s counsel s sworn affidavit that he sent the complaint to the proper address, an airbill indicating that the mailing concerned the plaintiff, and documents showing that someone signed for the mailing). That the Secretary did not issue the statutorily-required notice, investigate, or issue written findings did not cause the court to infer nonreceipt. Id. at 804. The fact that the plaintiff failed to file his complaint with the appropriate DOL area director as required by DOL regulations, and failed to contact the DOL after not receiving the DOL report required by statute after 60 days, was not by itself a bad faith delay on the part of plaintiff. Id. Several administrative decisions have considered whether the doctrines of equitable estoppel or equitable tolling may apply to allow an otherwise time-barred action to proceed. Equitable tolling did not apply where (1) the complainant, represented by counsel, claimed his and his counsel s ignorance of SOX s protections; and (2) contacted both the SEC and his state s department of fair employment and housing within the limitations period but did not prove that he alleged to those agencies facts that would amount to a SOX violation. See Moldauer v. Canandaigua Wine Co., 2003-SOX at 2-3 (ALJ Nov. 14, 2003) (dismissing claim as time barred). Nor did equitable estoppel apply where no evidence existed that the respondent prevented the complainant from pursuing his rights as a whistleblower. An ALJ also refused to toll the statute of limitations where the complainant asserted that his travel outside of the country delayed his ability to file a complaint with the DOL because his trip was not at the respondent s request. Flood v. Cedant Corp., 2004-SOX-16 at 2 (ALJ Feb. 23, 2004). SOX s whistleblower protections do not have retroactive effect. ALJs have uniformly held that SOX does not protect whistleblowers where the activities and the unfavorable personnel action occurred before SOX s enactment date, July 30, Gilmore v. Parametric Tech. Corp., 2003-SOX at 5 (ALJ Feb. 6, 2003); Kunkler v. Global Futures & Forex, Ltd., 2003-SOX at 3 (ALJ April 24, 2003); McIntyre v. Merrill, Lunch, Pierce, Fenner & Smith, Inc., 2003-SOX-23 at 7 (ALJ Jan. 16, 2004) (finding continuing violation theory inapplicable where alleged discrimination occurring within the limitations period comprised discrete acts of alleged discrimination). 9

13 3. DOL Investigation After receiving the complaint, DOL must notify the named person(s) 7 of the complaint, its allegations, and the evidence supporting the complaint. 49 U.S.C (b)(2)(A); 29 C.F.R (a); see also 18 U.S.C. 1514A(b)(2)(B). The regulations contemplate that the information relating to the identity of confidential informants will be redacted. 29 C.F.R (a). The statute requires that both the person named in the complaint and the employer receive such notice. 18 U.S.C. 1514A(b)(2)(B). The notice must also disclose the standards for determining (1) whether an investigation is warranted; and (2) whether reasonable cause exists to believe that a SOX violation has occurred. 29 C.F.R (a). It must also notify the named person that, if the Administrative Review Board (the Board ) ultimately determines that a complaint was frivolous or made in bad faith, the named person may be entitled to a reasonable attorneys fee not exceeding $ C.F.R (a), (e). Further, a copy of this notice must be sent by DOL to the SEC. 29 C.F.R (a). 8 Within 20 days of the filing of the complaint, the named person has the right to submit a written position statement and any supporting materials, and request a meeting with the DOL officer in charge of investigating. 29 C.F.R (c); see 49 U.S.C (b)(2)(A). DOL will investigate only if the complainant makes a prima facie showing that Section 806 has been violated. 29 C.F.R (b)(2). (see, infra, Section II.F. for discussion of prima facie elements). If this showing is not made, DOL will dismiss the complaint. If the named person demonstrates by clear and convincing evidence that it would have taken the same unfavorable personnel action in the absence of the complainant s protected behavior or conduct, the DOL will not investigate. 29 C.F.R (c); see 49 U.S.C (b)(2)(B)(ii). This may be demonstrated by the position statement(s), supporting affidavits, and, if so requested, witness statements in a meeting with the DOL. 29 C.F.R (c). If the named person fails to convince DOL it would have made the same decision absent the protected activity, the DOL will conduct an investigation. Procedures to protect the confidentiality of the information provided by non-complainants may be followed. No later than 60 days after the receipt of the complaint, the DOL should issue written findings stating whether or not there is reasonable cause to believe that a violation of Section 806 has occurred U.S.C (b)(2); 29 C.F.R If such reasonable cause exists, the The regulations define named person to include the employer and/or the company or company representative named in the complaint who is alleged to have violated the Act. 29 C.F.R Person is defined to mean one or more individuals, partnerships, associations, corporations, business trusts, legal representatives or any group of persons. 29 C.F.R According to the DOL Whistleblower investigation manual, copies of the investigation report and any orders associated with the hearing or appeal must also be provided to the SEC. The SEC must certify that the documents will not be disseminated outside the SEC without DOL approval. Manual 14-4, If the DOL officer investigating the complaint finds reasonable cause to believe that discrimination has occurred, the employee may be entitled to reinstatement pending the outcome of the case. 29 C.F.R (e), (a). Any such preliminary order requiring reinstatement is effective immediately, 10

14 DOL shall issue findings and a preliminary order providing relief. 49 U.S.C (b)(2)(A); 29 C.F.R (a)(1). The findings and preliminary order will inform the parties of their rights to file objections and request a hearing, and is effective 30 days after receipt by the named person. 29 C.F.R (b), (c). 4. Hearing Before an Administrative Law Judge The DOL s decision to investigate or refrain from investigating a complaint is not reviewable by the ALJ and a complaint may not be remanded for a completion of an investigation or for additional findings. 29 C.F.R (a). After the DOL issues its findings and preliminary order, either party may file objections and request a hearing on the record by filing such with the Chief ALJ within 30 days. 49 U.S.C (b)(2)(A); 29 C.F.R (a). 10 The objections must be in writing and explain whether the objections are to the findings, the preliminary order, or both, and state whether there should be an award of attorneys fees. 29 C.F.R (a). If no hearing is requested or if no objections are received within 30 days after the date of notification of the findings and preliminary order, such order is the final order, not subject to judicial review. 49 U.S.C (b)(2)(A); 29 C.F.R (b)(2). The Chief ALJ will assign the case to an ALJ who will notify the parties of the hearing date, time, and place which shall be conducted expeditiously. 29 C.F.R (b); 49 U.S.C (b)(2)(A); 29 C.F.R (b). The ALJ has broad discretion to limit discovery in order to expedite the hearing. 29 C.F.R (b); Welch v. Cardinal Bankshares Corp., 2003-SOX-15 at 6 (ALJ Aug. 15, 2003) ( Welch I ) (exercising such power to limit additional discovery where the discovery was filed two days before the deadline set by the ALJ). The rules of practice and procedure for the Office of the Administrative Law Judges (OALJ), codified at 29 C.F.R. 18.1, et seq., govern such hearings. 29 C.F.R (a); see Flake, 2003-SOX at 2 (applying 29 C.F.R summary judgment standard). No formal evidentiary rules are applicable, but ALJs must employ rules designed to assure production of the most probative evidence and may exclude immaterial, irrelevant, or unduly repetitious evidence. 29 C.F.R (d); Welch I, 2003-SOX-15 at 2-3 (allowing relevant expert opinion of law on whether the attorney-client privilege at a company meeting would be vitiated if the complainant were allowed to have his private attorney present). The ALJ is required to issue a and may not be stayed by virtue of the respondent filing an appeal. 29 C.F.R (c); 49 U.S.C (b)(2)(A). However, where the named person establishes that the complainant is a security risk (whether or not the information is obtained after the complainant s discharge), a preliminary order [by a DOL investigating officer] of reinstatement would not be appropriate. 29 C.F.R (a)(1). AIR is silent as to whether the filing of objections automatically stays any other relief, but the regulations provide that all other provisions of the preliminary order will be stayed upon timely objection. 29 C.F.R (b)(1). 10 The ALJ in Lerbs v. Buca Di Beppo, Inc., 2003-SOX-8 at 3 (Dec. 30, 2003) held that any defect in filing for a review of a DOL investigatory report may be subject to equitable tolling because the rules governing the procedure to object and request a review of a preliminary order are procedural only, not jurisdictional. 11

15 final order, containing findings and conclusions, within 120 days after the hearing concludes. 49 U.S.C (b)(3). 5. Review by the Administrative Review Board and Appeal to the Appropriate Circuit Court A party seeking review by the Board must file a written petition within ten business days of the ALJ s decision. 29 C.F.R (a). The Board s review is discretionary, and is conducted under the substantial evidence standard. 29 C.F.R (b); Walker v. Aramark Corp., 2003-SOX-15 at 3 (ARB Nov. 13, 2003) (declining to accept the case for review, without explanation). If the Board does not accept the case for review, the ALJ s decision becomes final 30 days from the request for review. 29 C.F.R (b). If the Board accepts the case for review, the ALJ decision is inoperative unless the Board issues an order adopting the decision. 29 C.F.R (b). However, any preliminary reinstatement order will stand pending Board decision. 29 C.F.R (b). A final Board decision will be issued within 120 days from the close of the hearing. 29 C.F.R (c). Any final order is appealable to the United States Court of Appeals for the circuit in which the violation allegedly occurred or the circuit in which the complainant resided on the date of the violation by filing within 60 days after the issuance of certain final orders. 29 C.F.R ; see 49 U.S.C (b)(4)(A). Such appeal will not stay operation of the final order. 49 U.S.C (b)(4)(A). The appeals court may only overturn the Board s decision if it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law. 5 U.S.C. 706(2)(A). The court may, however, set aside the Board s factual determinations if they are unsupported by substantial evidence. 5 U.S.C. 706 (2)(E). The court s review in this regard is plenary. See, e.g., Doyle v. U.S. Secretary of Labor, 285 F.3d 243, 249 (3d Cir. 2002) (administrative review of DOL s decision under whistleblower provision of Energy Reform Act). 6. Enforcement of Settlement Agreement or Administrative Order The parties may end the proceedings at any point before a final order is issued by entering into a settlement agreement that is approved by the DOL. 49 U.S.C (b)(3); 29 C.F.R (a), (d). Harrison v. Gold Banc Corp. Inc SOX-17 (ALJ July 9, 2003) (approving settlement for good cause shown, citing Fed. R. Civ. P. 41(a) and 29 C.F.R. 18.9(c)(2)); Plants v. J.P. Morgan Securities, Inc., 2003-SOX-19 (ALJ Aug. 7, 2003) (approving settlement agreement as fair and reasonable). An approved settlement becomes the final order of the DOL investigator, the ALJ, or the Board, depending on which entity approves the settlement, and may be enforced by the DOL. 29 C.F.R (d)(e), If a party fails to comply with a DOL order or the terms of a settlement agreement, the DOL may file an enforcement action in the federal district court. 29 C.F.R

16 7. Right to File in Federal District Court SOX provides that if the Secretary has not issued a final decision within 180 days of the filing of the complaint and there is no showing that such delay is due to the bad faith of the claimant, [the claimant may bring] an action at law or equity for de novo review in the appropriate district court of the United States, which shall have jurisdiction over such an action without regard to the amount in controversy. 18 U.S.C. 1514A(b)(1)(B); see 29 C.F.R A DOL official has acknowledged that the 180-day time limit is almost impossible for DOL to meet, but that people [remain] in the DOL process despite the timing because of the sense that the review system was fair and successful. Whistleblowers, Sarbanes Oxley Cases are Core of Nontraditional DOL Cases, IER Newsletter, Vol. 173, No. 17 (BNA Dec. 22, 2003). The statute does not contain a jury trial right. The aggrieved employee must file notice with the ALJ or the Board (depending on where the case is then pending) of his or her intent to file a complaint with the District Court and serve notice on all parties and on the Assistant Secretary of OSHA and the Associate Solicitor of the Division of Fair Labor Standards. 29 C.F.R (b). It is unclear whether an employee who invokes this qualified right to file in federal court after 180 days automatically divests the DOL of jurisdiction by doing so. At least one ALJ did not agree that that his office was divested of jurisdiction after the complainant filed in federal district court until the district court granted the complainant a stay of the DOL proceedings. Stone v. Duke Energy Corp. 3:03-CV-256 (W.D.N.C. June, 10, 2003) ( [T]he Administrative Law Judge issued a ruling stating that he would retain jurisdiction over the case, and the pending summary judgment motion filed by [respondent], until such time as the motion is decided or until a Judge in the District Court agrees with Claimant and asserts that he or she has jurisdiction ); Stone v. Duke Energy Corp., 2003-SOX-12 (June 19, 2003). Other ALJs have granted motions to dismiss upon complainant s showing that he or she filed in district court after 180 days have elapsed, and absent any showing that the delay was due to complainant s bad faith. Willy v. Ameriton Properties, 2003-SOX-9 (ALJ June 19, 2003); Williams v. Bordon Chemical, Inc., 2003-SOX-10 (ALJ Oct. 14, 2003); Livingston v. Wyeth Pharmaceuticals, 2003-SOX-25 (ALJ Oct. 6, 2003); Frazer v. Fiduciary Trust Co. Int l, 2003-SOX-28 (ALJ Dec. 30, 2003); Carnero v. Boston Scientific Corp., 2004-SOX-22 (Jan. 22, 2004) 8. Effect of Arbitration Agreement The only federal court to have addressed the issue in a published decision has ruled that an agreement providing for mandatory arbitration of all employment disputes is enforceable with respect to a claim brought under SOX. Thus, in Boss v. Salomon Smith Barney Inc., the court granted the employer s motion to stay the district court action and compel arbitration before the National Association of Securities Dealers where the employer s policies provided that arbitration was the required, and exclusive, forum for the resolution of all employment disputes based on legally protected rights... including without limitation claims demands or actions under... any... federal, state or local statute, regulation or common law doctrine, regarding... termination of employment. 263 F. Supp. 2d 684, 685 (S.D.N.Y. 2003). The court rejected the 13

17 plaintiff s assertion that SOX claims were exempt from mandatory arbitration provisions, stating that [t] here is nothing in the text of the statute or the legislative history of the Sarbanes-Oxley act evincing intent to preempt arbitration of claims under the act[; n]or is there an inherent conflict between arbitration and the statute s purposes. Id. F. Burden of Proof To prevail on a retaliation claim under Sarbanes-Oxley, either at the administrative or court level, an aggrieved employee must demonstrate that his or her protected activity was a contributing factor in the respondent s decision to take the unfavorable personnel action. 49 U.S.C (b)(2)(B)(iii). The complainant must make this showing by a preponderance of the evidence. Welch II, 2003-SOX-15 at 35. Thus, the complainant must establish that: (1) he engaged in protected activity; (2) his employer was aware of the protected activity. At least one case indicates that the ultimate decisionmaker does not have to have actual knowledge of the protected activity where an individual with knowledge contributes information that forms the basis of the decision. See Platone, 2003-SOX-27 at 24. Thus, in Platone, the complainant s supervisor had knowledge of her protected activity. He suggested that the complainant should be terminated for a separate reason. In discussions regarding the complainant s termination, the supervisor did not reference the protected activity. Nevertheless, the ALJ determined that the supervisor instigated the termination based on the protected activity and that his knowledge could therefore be imputed to the decisionmakers. (3) he suffered an unfavorable personnel action; and (4) circumstances exist which are sufficient to raise an inference that the protected activity was likely a contributing factor in the unfavorable personnel action. Welch II, 2003-SOX-15 at 35. The words contributing factor... mean any factor which, alone or in connection with other factors tends to affect in any way the outcome of the decision. Id. at 36. (quoting Marano v. Department of Justice, 2 F.3d 1137, 1140 (Fed. Cir. 1993)). Temporal proximity alone will likely be considered sufficient to raise an inference of causation. 29 C.F.R (a); 29 C.F.R (b)(2). Once the complainant meets this burden, an inference of unlawful retaliation is created. Id. The respondent may, however, avoid liability by establishing by clear and convincing evidence that it would have taken the same unfavorable personnel action in the absence of the protected activity. 49 U.S.C (b)(2) (B)(iv). Thus, the respondent is required to meet a high evidentiary standard in putting forth a legitimate, non-retaliatory reason for its actions and, importantly, the burden never shifts back to the complainant to establish pretext. 14

18 To date, only a handful of Section 806 cases have been decided on the merits. A few of these cases warrant detailed discussion because they indicate that the DOL s initial application of the statute and the employee-favorable burden of proof are creating negative precedents for employers. In Welch II, 2003-SOX-15, the aggrieved employee, the company s CFO, claimed that he was terminated because he reported a number of financial problems to the CEO, including accounting errors in the company s past financial statements and the company s noncompliance with thenrecently enacted SOX with respect to required certifications and disclosures. Further, the CFO told the CEO that he would not sign the company s certification, required by SOX, that the company s third quarter report does not contain any untrue statement of a material fact, or omit to state a material fact [and is] not misleading. Welch II, 2003-SOX-15 at The respondent asserted that Welch was actually terminated because he refused to meet with the company s attorney and independent auditors, who had been asked by the respondent s Audit Committee to investigate Welch s claims, unless he (Welch) could have his personal attorney present. The ALJ held that the complainant proved that his whistleblowing activities were a contributing factor in the company s decision to terminate him. The unfavorable personnel action occurred only six to seven weeks after he reported his concerns to the company s external auditors and to the CEO. Further, the ALJ concluded that the respondent s alleged reason for Welch s termination his refusal to meet with the company s attorney and independent auditor without his personal attorney was not believable. The ALJ determined that, after reviewing Welch s reports of improper accounting practices, the company took substantial steps to terminate Welch before he ever refused to attend an investigatory meeting without his attorney. For example, upon first learning of Welch s allegations, the Company s Audit Committee held a meeting in which the Committee focused on the complainant s alleged poor performance before requesting an investigation of his allegations. In addition, the resulting investigation report to the board was replete with criticisms of Welch s performance. Further, the committee never adopted a formal resolution prohibiting the employee from having his personal attorney in attendance at the meeting. Therefore, the ALJ concluded that the complainant s refusal to meet with the investigation team without his attorney was not the real reason for his discharge. The respondent viewed the CFO as a discontented employee whose allegations of wrongdoing with which it mostly disagreed were part of his plan to leave his employment and exact a severance package on the way out the door. The respondent argued that Welch was terminated solely based on his refusal to meet with its investigators without his personal attorney. The Bank maintained that the presence of Welch s attorney would have destroyed the attorney-client privilege and would have turned the fact-finding investigation into an adversarial process. The Bank further argued that Welch had no right to representation at the investigation, citing general employment law principles [that allow the company to terminate the employee] for even consulting with [personal] counsel on a matter related to his duties at the company. Welch II, 2003-SOX-15 at 44. The ALJ rejected this argument, finding that the investigation s purpose was to manufacture a situation whereby [the employee] would not attend the meeting so they could use that act as a justification for terminating his employment. Id. 15

19 The ALJ further rejected the respondent s argument that allowing the employee s attorney to be present at the meeting would have destroyed the attorney-client privilege because: (1) the sole purpose of the meeting was to elicit information from the employee and thus all information disclosed in the meeting would already have been known by Welch; (2) the confidential information discussed at the meeting could not have been disclosed because the employee was a fiduciary of the company and his personal attorney would be under a duty to maintain the confidentiality of such information; (3) SOX requires that the type of information that the complainant raised be disclosed to the government and does not support the company s assertion that it had a right to maintain the confidentiality of that information; and (4) board minutes reflected that a third party with whom the employer was attempting to merge was going to be apprised of the employee s allegations, which would effect a waiver of the privilege in any event. Welch II, 2003-SOX-15 at Also, the ALJ asserted that the privilege does not apply in instances where the employee later becomes adverse to the employer and certain other conditions are met. Id. at 46. Finally as an officer of the corporation acting in furtherance of his fiduciary duty to disclose wrongdoing, the complainant had the power to waive the attorneyclient privilege that might have attached to the meeting. Id. at 47. Therefore, the ALJ concluded that the respondent could not assert that its reason for excluding the CFO s attorney was to preserve the privileged nature of the communications. The ALJ s decision is currently on appeal to the Board. See Molly McDonough, Fired CFO Wins Early Sarbanes Claim, 3 ABA Journal ereport 6 (Feb 15, 2004), at journal/ereport/f13sarbanes.html. The Platone and Getman cases also are notable for their negative precedent for employers. These cases are discussed in detail in Sections II.C, supra. There has been one decision in which the ALJ found in favor of the employer on a substantive issue. In Halloum, the employee had a series of documented performance problems for which he had been poorly reviewed and had been placed on a corrective action plan ( CAP ). While he was out on a medical leave, the employee alerted the SEC and Intel s CEO that he believed that his supervisor was improperly deferring payment on invoices in order to boost profits. An internal investigation revealed that Halloum s allegations were completely unfounded. During Halloum s absence on medical leave, the employer also learned that Halloum had improperly pressured his subordinates to provide favorable reviews of his performance and that he had secretly taped conversations with his subordinates, supervisors and others. When Halloum returned from his medical leave, his supervisor placed him on a revised CAP. The ALJ determined that the revised CAP set requirements that Halloum could not possibly meet and thus was retaliatory, in part, for his complaint about his supervisor s accounting practices. The ALJ determined, however, that Intel established by clear and convincing evidence that it would have placed Halloum on the revised CAP regardless of his protected activity in light of his performance failures and misconduct. The ALJ appeared heavily swayed by the fact that Halloum s various performance problems had been well documented before the company ever became aware of his complaint of fraudulent accounting practices. 16

20 G. Remedies SOX provides that the employee should be entitled to all relief necessary to make the employee whole, including reinstatement, back pay and attorneys fees and costs. 18 U.S.C. 1514A(c), (d). See also 29 C.F.R (a)(1). In Welch II, for example, the ALJ reinstated the employee to his former position as CFO. He also awarded back pay with interest and all costs and expenses, including attorneys fees, reasonably incurred. Welch II at 48. In addition to reinstatement with the same seniority status, a court may grant other equitable remedies, including writs of mandamus and stays with respect to proceedings before the DOL. SOX does not specifically limit the remedies available to the Court once it exercises jurisdiction. Stone v. Duke Energy Corp., 3:03-CV-256 (W.D.N.C. June 10, 2003) (declining to issue a writ of mandamus compelling the DOL to complete the administrative proceeding where the DOL does not appear ready to [issue a final order] anytime in the immediate future and granting a stay of the DOL proceeding); Corrada v. McDonald s Corp., No (JAG) (D.P.R. June 22, 2004) (staying DOL proceedings); see also 68 Fed. Reg. at 31,863 (May 28, 2003) ( Where an administrative hearing has been completed and a matter is pending before an administrative law judge or the Board for a decision, a Federal court also might treat a complaint as a petition for mandamus and order the Department to issue a decision under appropriate time frames ). SOX also permits an award of a reasonable attorney s fee to respondent not to exceed $1000 to the employer for frivolous or bad faith complaints. 49 U.S.C (b)(3)(C). A named person who believes that the complaint is frivolous or made in bad faith may seek this award by filing such a request within 30 days of receipt of the DOL s findings and preliminary award. 29 C.F.R (a). SOX does not include a provision allowing for punitive damages H. Criminal Liability Section 1107 of SOX amends the obstruction of justice statute to make it a criminal violation to retaliate against employee whistleblowers: Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense. 18 U.S.C. 1513(e). Note that this provision appears to cover disclosures for any violation of federal law not just those dealing with securities and other corporate fraud, but only deals with truthful reports to a law enforcement officer and thus, does not cover internal whistleblowing. Violation of this provision is punishable by fines of up to $250,000 for individuals or $500,000 for companies, 10 years imprisonment, or both. Id. This provision of the statute has extraterritorial effect. By comparison, the civil liability provision of SOX does not explicitly extend to employment outside the United States and we are aware of a preliminary finding by the DOL that declined to give extraterritorial effect to Section 806 of SOX. We also are aware that this 17